Private returns to vocational education and training qualifications
Michael LongChandra Shah
Centre for the Economics of Education and Training Monash University
The views and opinions expressed in this document are those of the author/project team and do not necessarily reflect the views of the Australian Government, state and territory governments or NCVER
Publisher’s note
To find other material of interest, search VOCED (the UNESCO/NCVER international database <http://www.voced.edu.au>) using the following keywords: investment in training; qualifications; return on investment; training; training course.
© Australian Government, 2008
This work has been produced by the National Centre for Vocational Education Research (NCVER) on behalf of the Australian Government and state and territory governments, with funding provided through the Australian Department of Education, Employment and Workplace Relations. Apart from any use permitted under the Copyright Act 1968, no part of this publication may be reproduced by any process without written permission. Requests should be made to NCVER.
The views and opinions expressed in this document are those of the author/project team and do not necessarily reflect the views of the Australian Government, state and territory governments or NCVER.
The author/project team was funded to undertake this research via a grant under the National Vocational Education and Training Research and Evaluation (NVETRE) Program. These grants are awarded to organisations through a competitive process, in which NCVER does not participate.
The NVETRE program is coordinated and managed by NCVER on behalf of the Australian Government and state and territory governments with funding provided through the Department of Education, Employment and Workplace Relations. This program is based upon priorities approved by ministers with responsibility for vocational education and training (VET). This research aims to improve policy and practice in the VET sector. For further information about the program go to the NCVER website <http://www.ncver.edu.au>.
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About the research
Private returns to vocational education and training qualifications by Michael Long and Chandra Shah
Much attention has been given to thinking about how to respond to the current skills shortage in Australia. One response has been to encourage people to enrol in vocational education and training (VET). But why enrol in a VET course? An essential part of the story is the financial benefit from doing a course. This study provides estimates of the rates of return to students enrolling in VET courses.
An estimate of the rate of return from enrolling in a VET course considers the study as an investment by the student in his or her future income. It treats the costs of study as an investment and expresses future increases in income resulting from undertaking the course as a rate of return on that investment—akin to an interest rate. In other words, the higher the interest rate, the better the investment for the student.
The rate of return framework provides a very useful way of looking at the private benefits of various qualifications. However, it is important to understand how it is constructed because the structure plays an important role in determining the answers. Distinctive features of the model used in this paper include the following:
The cost of education includes forgone income. This means that the rate of return is lower for full-time students than for part-time students because their forgone earnings are included as a cost. This values leisure as having no value, and doesn’t include any personal satisfaction that might come from the ‘full-time student experience’.
Income is used rather than, as is more common, earnings. The advantage of this is that the calculations include the effects of qualifications in securing employment.
Finally, the model excludes those with university qualifications, and so it cannot be used to compare the value of VET and university qualifications.
Key messages
VET is a good investment for males undertaking diplomas or certificates III or IV and females undertaking diplomas, with rates generally exceeding 20% for those studying full-time.
For males, the rates of return are similar for full-time students doing diplomas and those completing higher-level certificates. While incomes are higher for those undertaking diplomas, the period of study is longer.
Rates of return increase greatly for part-time students because forgone earnings are lower.
An increase in tuition fees would reduce rates of return, but they remain healthy even under high-fee scenarios.
This study provides valuable insights into the private returns from undertaking VET. However, many interesting questions remain, including whether these rates have changed in recent years, how they compare to the return from university level study and the exact nature of the interrelationship between the year left school and the level of VET qualifications.
Tom Karmel
Managing Director, NCVER
Contents
Tables and figures
Executive summary
Introduction
The concept of rates of return
Previous research
The costs
The benefits
Estimates of rates of return
Summary
VET qualifications
Providers and qualifications
Overseas qualifications
Qualification pathways
Income and qualifications
An income equation
What do VET students pay?
Course costs
Income forgone while studying
Non-completion
Subsidies
Summary
Rates of return
An example of the calculations
The results
Implications
References
Tables and figures
Tables
1Calculation of rates of return for hypothetical costs and benefits
2Wage effects of VET qualifications for full-time employees
3Rates of full-time employment by educational attainment and
sex compared with early school leavers with no post-school qualifications, 1993 and 1997
4Estimated rates of return to VET qualifications
5Estimates of internal rates of return for selected VET
qualifications for different quantiles
6Post-school educational qualifications by type of awarding institution: Persons aged 15 to 64, Australia 2005 (%)
7Highest post-school educational qualification by highest grade
of school completed and sex: Persons aged 15 to 64, Australia
2005 (%)
8Regression of log net weekly income on highest educational qualification, schooling and other variables: Males and females
aged 15 to 64, Australia 2005
9Percentage effects of highest VET qualification on income
by age, sex and level of schooling
10Maximum annual fees for government-supported places by
state and territory, 2003
11Percentage of students currently enrolled for a qualification who received recognition for prior learning, Australia 2005
12Annual net income forgone while studying full-time by sex, age and level of schooling: Persons aged 15 to 64, Australia 2005 32
13Percentage enrolled part-time by sex: Persons currently enrolled
for a qualification, Australia 2005
14Percentage of students currently enrolled for a qualification who receive financial support, Australia 2005
15Estimated costs for VET courses, Australia 2005: Males
16Estimated costs for VET courses, Australia 2005: Females
17Example of calculation of rates of return: VET advanced
diploma or diploma, young males with Year 12, full-time study
in a government-supported place
18Estimates of rates of return to VET qualification by sex,
Australia 2005
Figures
1Estimated after-tax annual income by age and highest VET qualification: Males who have completed Year 12
2Estimated after-tax annual income by age and highest VET qualification: Males who have completed Year 10
3Estimated after-tax annual income by age and highest VET qualification: Females who have completed Year 12
4Estimated after-tax annual income by age and highest VET qualification: Females who have completed Year 10
Executive summary
This report presents estimates of the private rates of return for students studying for vocational education and training (VET) qualifications in Australia. Estimates of rates of return are commonly used by governments, businesses and others to compare the merits of different forms of investment where costs or benefits or both are distributed over time. The approach results in a single number that can be interpreted as an interest rate: the higher the interest rate, the higher the rate of return and the better the investment.
Education and training are grist to the mill of this type of analysis—students pay for their education and training qualification while they are studying and then (hopefully) receive higher income further down the track. As with any calculations involving investment and expected future earnings, there is considerable uncertainty for individual students—they may not pass their course; they may not be able to use their knowledge and skills because of unemployment, illness or death; they may decide on a change in direction in life and not want to use their knowledge and skills; and so on. The uncertainty in the estimates and the risks in the undertaking, however, are not necessarily greater for education and training than for other investments.
Students make similar kinds of calculations about courses, but often only in the vaguest of ways—how long does the course take? how much does it cost? will I find a job when it’s over? and how much will it pay? They are also motivated by intangibles—will I like the course? and will I like the kind of job I might get at the end of the course?
More rigorous calculations of the rates of return to VET courses are required to determine whether VET courses provide potential students with sufficient financial incentives to enrol. Analyses of data from the Australian Bureau of Statistics (ABS) 2005 Survey of Education and Training were used to identify the additional income people with different levels of educational attainment (advanced diplomas and diplomas; certificates III and IV; and certificates I and II) received at different ages. This additional income was compared with the costs of enrolling in VET courses to provide estimates of rates of return separately for males and females of different ages and with different levels of schooling enrolled full- or part-time in different level courses.
The major findings and their implications are highlighted in the points below:
The rates of return to study in higher-level VET courses mostly provide students with a better-than-adequate incentive to enrol. Certificates I and II may be an exception. Although the estimated rates of return for certificates I and II are also sometimes high, they are based on small income effects. This combination of small income effects and small costs leads to unstable estimates. However, even if returns to these lower-level qualifications are low, they may still be valuable to students as stepping stones to higher-level qualifications.
The rates of return to study in VET courses differ from those reported in some earlier studies.
The rates of return for advanced diplomas and diplomas are higher than corresponding results reported in earlier studies.
The rates of return for certificates III and IV are higher or similar to corresponding results reported in some earlier studies.
The rates of return for certificates I and II are variable, and earlier studies suggested higher rates of return for lower-level VET courses.
The variability between this and previous studies can be attributed to differences in:
how qualifications were classified in the analyses—the Australian Qualifications Framework (AQF) categories used in this analysis do not fully correspond with classifications used in previous studies
comparison groups used—this study used people whose highest level of schooling was Year 12, Year 10 or Year 9; whereas other studies have used people without post-school qualifications who completed or did not complete school, or those who left school before age 16
how the income equations were formulated—this study used income rather than the wages and salaries often used in other studies. It also accounted for employment effects by including incomes of employers and the self-employed as well as those who are not employed. Furthermore, the income equations used in this study deliberately include only a more limited set of control variables than those sometimes used in other studies.
Increased tuition charges to students reduce, but mostly do not remove, the economic incentives for students to enrol in higher-level VET courses. The effect of higher tuition fees on lower-level VET courses is less certain. This result is consistent with findings that have led other researchers to advocate an increased contribution by students to the costs of their study.
The rates of return for advanced diplomas and diplomas and for certificates III and IV are similar, with some variation across other categories. The similar rates of return suggest that the value of the additional investment in obtaining an advanced diploma or diploma is commensurate with that made to obtain a certificate III or IV.
Age makes only a small difference to the rates of return, which suggests that older students have almost the same economic incentives to enrol in VET courses as younger students. Policies designed to encourage lifelong learning and to upgrade the skills of older workers need to consider non-financial aspects of the motivation to study.
Rates of return are higher for part-time study than for full-time study. Full-time students face additional costs because they forgo the opportunity of full-time work while studying and the income they could have received. About three in every four VET students are enrolled part-time.
Rates of return are mostly slightly higher for those whose highest level of schooling is Year 10 rather than Year 12, especially for females, which points to the value of VET as a pathway for persons who do not complete their schooling.
Introduction
This report presents estimates of the private rates of return for vocational education and training (VET) qualifications in Australia. The underlying approach views education and training as an investment by the student that has the potential to yield future economic benefits.
A rate of return is typically a single number—such as 10%—that can be interpreted as an interest rate that summarises the costs and benefits, over time, associated with undertaking some investment—generally, the higher the rate of return, the better the investment.
A single number summarising the costs and benefits of an investment over time allows governments and businesses to compare the financial merits of different projects and to decide which, if any, projects to fund. Rates of return can be estimated for a wide variety of investments, including major infrastructure such as freeways (ConnectEast Management 2004) and railways (Booz, Allen & Hamilton 1999) and funding programs to reduce early school leaving (Allen Consulting Group 2003).
In the context of education, estimates of private rates of return measure the economic value of the qualification to the individual student. They can inform answers to questions about whether:
students have a financial incentive to enrol
some students (males or females; younger or older; early school leavers or Year 12 completers) have greater financial incentives to enrol than others
some courses provide better financial outcomes than others
the balance between the contributions of government, students and employers to the costs of the course is appropriate
financial incentives for study have changed over time
financial incentives for study vary among countries.
Answers to these questions form part of any discussion of broader issues about access to post-school education and skills shortages.
The next chapter briefly considers rates of return by examining an example of the way in which estimates are calculated. Subsequent chapters review previous research and then examine the distribution of VET qualifications and provide separate estimates of the benefits from, and costs of, VET qualifications. These are then combined into estimates of rates of return for types of VET qualifications, for male and female students, for full- and part-time students, for students with different ages and for different tuition costs. A final chapter considers the implications of the findings.
The concept of rates of return
This chapter provides a brief overview of the concept of rates of return. There are different ways of calculating rates of return. Consistent with much of the broader literature on the rates of return to educational qualifications, this report is concerned with the private internal rate of return. The term private is used because the focus is on the returns to the student him- or herself rather than to the government, the employer, or society as a whole.
Formulas can be used to calculate the internal rate of return from an educational qualification given information about the distribution of costs and benefits over time (see, for instance, Borland 2002). Conceptually, these formulas can be interpreted as saying that the rate of return is the interest rate that equates costs and benefits discounted by that interest rate over time.